Unrepaired Education Department System Leaves Thousands Stuck in Default

April 19, 2012

Karla De La Torre kept her end of the bargain.

After defaulting on her federal student loan, she entered into a "rehabilitation" agreement with the collection agency and made the required nine on-time payments toward the debt. According to the agreement, her loan was supposed to be restored to good standing last September.

Instead, Ms. De La Torre is stuck in default, the victim of a systems glitch that is taking the Education Department months to correct. Her collection agency told Ms. De La Torre, an executive assistant whose husband was laid off a year and a half ago, that she has to keep paying until the problems are fixed, and it can't say for sure how long that will be.

"I was told the beginning of the year, then April, and then May," said Ms. De La Torre, who graduated from California State University at Long Beach in the mid-90s. "I'm beginning to think it's never going to happen."

Four months after The Chronicle broke news of widespread problems with the Education Department's new debt-management system, tens of thousands of defaulted borrowers remain in financial limbo, unable to clear their credit histories. Meanwhile, delays in issuing wage-garnishment orders continue to cost the government millions in lost recoveries each month.

Under federal law, borrowers who rehabilitate their loans have their credit histories cleared and become eligible for new federal student aid. They can also receive deferments or forbearances on their loans, or enter into income-based repayment plans.

In December, the department said it expected to get caught up on rehabilitations like Ms. De La Torre's by the end of the month. Since then, the number of borrowers languishing in default has more than doubled, from 42,000 to 90,000. Officials now say the loans will be rehabbed by the end of April.

The department says it has fixed many of the problems that The Chronicle reported on last year. After a lapse of several months, newly defaulted loans are being sent to collection agencies, and the Treasury Offset Program, which deducts money from Social Security payments and tax refunds, is "fully operational," just in time for tax season.

But the debt-management system, which tracks and manages more than $30-billion in defaulted student loans, continues to frustrate borrowers and collection agencies alike. Privately, some in the student-loan industry question the department's decision to accept a system offered free by its longtime servicer, Affiliated Computer Services, rather than putting the contract out for bids, as originally planned.

'Serious Operational Issues'

Meanwhile, borrowers in good standing report lingering problems with the department's new loan-servicing system, which went live last fall. In an October blog post, the department said it was working to resolve the issues and would "ensure that no borrower is penalized or loses any benefit" as a result. Since then, hundreds of borrowers have commented on the post with complaints about difficulties accessing the site, fluctuating loan balances, and payments not being credited to accounts. Many wrote that it took multiple calls to get the department to correct the mistakes.

Department officials say the issues described in the blog comments have been addressed and the backlogs are being worked on. They note that the latest comment was posted in February and say complaints have fallen to levels seen before the system conversion.

But attorneys who work with student-loan borrowers say problems persist.

"There are still many, many serious operational issues with the Department of Ed," said Adam S. Minsky, a Boston-based attorney who focuses on student-loan law.

He said the new servicing system has created particular headaches for graduate students with in-school deferments and borrowers in income-based repayment plans. In some cases, graduate students have been wrongly notified that they have to begin repaying their loans before graduation; in others, low-income borrowers have been kicked out of income-based repayment plans and have struggled to get back in.

Brittney Lacy, a public defender who graduated from Northeastern University law school in 2009, says her payment jumped from $220 to $1,900 in February, only 15 days after she received a request to verify her income. Though she faxed in the forms immediately, she was told that it was too late to reverse the February charge, and was advised to go into forbearance, postponing payments until she was restored to an income-based plan. She reluctantly agreed, knowing forbearances don't count toward the 120-month payment requirement for public-interest loan forgiveness. Two months later, she's still waiting, while her account accrues interest and her loan-forgiveness date slips further into the future.

Still, Ms. Lacy considers herself "one of the lucky few," because she caught the $1,900 charge in time to enter forbearance. Some of her friends didn't realize they'd been switched to standard repayment plans until the money vanished from their bank accounts, she said.

"I can't imagine, as a public defender, having $2,000 taken out of my account and not having months to prepare for it," said Ms. Lacy, who makes $40,000 a year.

Republicans Ask for a Review

The systems problems have been an administrative and public-relations nightmare for the Education Department, which took on the task of making all federal student loans in 2010, after Congress ended bank-based lending. Republicans, who largely opposed the change, have seized on the glitches as evidence that the department is unprepared to handle the increased loan volume.

Last month, top Republicans on the House and Senate education committees sent a letter to the Government Accountability Office asking for a review of the department's administrative and debt-collection processes. "We are increasingly concerned the department may not be appropriately managing student debt," they wrote. And this week, House Republicans created a Facebook page seeking feedback from frustrated borrowers.

In the meantime, borrowers like Ms. De La Torre must simply wait. Each month, the government garnishes $700 of her wages, on top of the $180 she sends on her own. Money is so tight that she hasn't even been able to buy new shoes for her son.

"He's got all these holes, but school is almost done. I'm just waiting for summertime," she said.

Some days, she's tempted to stop paying and let her loan default again. After all, her balance is down to $3,000; if the government kept garnishing her wages, it would be paid off by the end of the year.

Other days, she's determined to see the process through, to clear her credit record of the default. After 16 months of scrimping, it would be "devastating," she said, "to know I did it all for nothing."